Insuring Against Success

Eight reasons why the health-insurance industry should change its position and support reform.

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Karen Ignagni

The insurance industry is in the business of predicting the future, sifting through statistics about risk and then setting a price to insure against it. I wonder, however, whether the calculations that led it to oppose health care reform were actuarially sound. If the bill fails in Congress, health insurers will likely be worse off.

Insurance is the only major sector in the health industry to actively oppose the health reform bill. Its lobby group, America's Health Insurance Plans, initially indicated a willingness to collaborate on the legislation and specifically to tolerate new regulations on matters like guaranteed issue (a prohibition on refusing customers based on pre-existing conditions) in exchange for an individual mandate (a legal requirement that everyone have health insurance). But shortly before the Senate finance committee completed its markup of the bill in October, AHIP issued a report claiming that the bill's various shortcomings, chief among them a weak enforcement mechanism for the individual mandate, would drive premiums 14 percent higher than they would otherwise be across the board. That was a far more dire estimate than the Congressional Budget Office's calculation the following month. The CBO said that health reform would increase premiums in the nongroup market by 10 percent to 13 percent—and that this would be more than offset by new federal subsidies for the majority of purchasers, and would reflect in part an increase in the policies' value. Health reform, the CBO found, would not increase premiums in the employer-based market, where most of us get our insurance.

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Over time, AHIP has refined its message. Initially its president, Karen Ignani, emphasized the weak individual mandate. But the individual mandate has proved unpopular, and AHIP's allies in the Republican Party have taken to arguing (without much basis in truth) that it's unconstitutional. (Never mind that the most prominent among them, Sen. Orrin Hatch, R-Utah, co-sponsored a bill in 1993 that included an individual mandate.) So now Ignani emphasizes that health reform does too little to control rising doctor and hospital fees, a matter of much broader concern.

I can sympathize with Ignani—to a point. Profit margins in the health insurance business aren't especially great. On Fortune magazine's list of the 53 most profitable industry sectors, health insurance ranks 35th. On the other hand, insurers' relative difficulty at making a buck has led them to behave in socially irresponsible ways. A March 3 Goldman Sachs report unearthed by Sam Stein of the Huffington Post (and lately flagged by the Obama White House) quoted an insurance broker saying that price competition was down (reflecting health insurers' trend toward local monopolization) and that insurance carriers "seem more willing than ever to walk away from existing business" by jacking up prices. A 2009 underwriting guide from BlueCross BlueShield of Texas suggests that, in the individual market, insurers are surprisingly unwilling to take on new business, too, unless the prospective client is ludicrously healthy. In her 2005 book Bait and Switch, Barbara Ehrenreich wanders into a hotel conference room where MetLife executives are gathered and watches them discuss "how many claims they can reject before they drive the client away." Health insurers continue the practice of "rescission," wherein they dump policyholders after they get sick based on trivial errors in their paperwork.

WellPoint, which is heavily concentrated in the nongroup market, is "somewhat exposed to the 80 percent individual MLR floor contemplated in the Senate bill," according to a March 4 report by the investment bank Cowen & Co. that was unearthed by Ezra Klein of the Washington Post. The MLR, or medical loss ratio, represents the percentage of the premium dollar that an insurer spends on health care. Although the AHIP has claimed an industrywide medical loss ratio of 87 percent, it's actually more like 81 percent and has been falling steadily since the early 1990s. In November an investigation led by Sen. Jay Rockefeller, D-W.Va., found that in the nongroup (or what Cowen & Co. calls the "individual") market, the average medical loss ratio was 79 percent, which helps explain why Cowen & Co. thinks the Senate bill's 80 percent minimum poses a problem. "Should [health] reform fail, WLP would be a primary beneficiary," the report concludes.

I'm no industry analyst, but I wonder whether Ignani and Cowen & Co. have assessed health insurers' interests correctly. The trend described above doesn't sound terribly sustainable: rising prices, fewer customers, a shrinking proportion of the premium dollar spent on health care, and routine cruelty toward frail and sickly people. "In the longer term, reform would have been better for them," Les Funtleyder, a health care strategist for the investment bank Miller Tabak and Co., told the New York Times in January, when health reform was presumed dead. The Obama bill has some obvious drawbacks for insurers, but they should consider its potential benefits.

1) A guaranteed customer base. Obama's health reform plan would expand the health insurance market by 30 million people. It would do this by handing the health insurance industry $411 billion in subsidies. (These numbers come from the RAND Corporation; the Congressional Budget Office hasn't scored the president's proposal.) Not a few people on the left oppose health-insurance reform on the grounds that it's a giveaway to corporate America. "It's a much better bill for insurance company investors than it is for the American people," says Rep. Dennis Kucinich, D-Ohio. "The Health Insurers Have Already Won," Business Weekpronounced back in August. If so, they're the sorest winners I've ever seen.

2) Not having health insurance would be against the law! If Congress were to enact legislation making it illegal not to read Slate every day, I might voice a few objections on policy grounds. From a financial perspective, though, I'd be tickled pink. Yet the insurers are actively resisting a bill that would do essentially the same for them. (I assure you, it isn't because they object philosophically.) Even if you accept AHIP's onetime contention that the Senate's bill didn't adequately penalize those who didn't buy insurance, the Obama proposal has toughened the penalty, raising it from 2 percent of income to 2.5 percent of income, which is what the House proposed. AHIP could probably get the penalty strengthened still further if it supported the bill rather than opposed it.

3) No public option. From the beginning, health insurers' biggest worry about health reform was that it would create a "public option" government health insurance plan to compete with private health insurers to sign up those 30 million uninsured. But the public option never made it into Obama's proposal, and it's unlikely to get shoehorned in later, because doing so would kill its (already weak) prospects of passing the House, where success hinges on winning over conservative Democrats. Obama last week reportedly told House liberals that he was "personally committed" to creating a public option after the bill is passed. But as I've noted before, if it's this difficult to create a public option today, trying to do so after the federal government makes private health insurers half a trillion dollars richer will surely be much more difficult. As a public-option supporter myself, I take no pleasure in noting this. But if insurers really want to smother the public option, their smarter long-term policy is to get the health reform bill passed.

4) The Cadillac tax has been emasculated. House Speaker Nancy Pelosi reportedly calculates that after extensive negotiations with labor groups and others, only 20 percent remains of the original proposal to tax high-cost "Cadillac" health insurance policies. A Feb. 22 column by David Brooks in the New York Times and a March 7 editorial in the Washington Post pronounce this a terrible tragedy. For reasons I've explained elsewhere, it is actually a blessing. But forget the high-minded dispute about what's the best policy. Even Brooks and the Post editorial board would agree that the steady erosion of the Cadillac tax is excellent news for insurers. Another point of agreement between Brooks and me: The Cadillac tax, which has already been delayed, will probably get killed outright before it ever takes effect. Brooks sees this as a demonstration of the squalor of special-interest politics. I see it as acknowledgment that the tax is misconceived and unworkable. From insurers' point of view, it doesn't make the slightest difference which of us is right. (Just for the record, though: I am.)

5) Obama isn't serious about imposing price controls on insurers. I've said it before and I'll say it again: I don't believe Obama truly wants to tell health insurers what they can charge customers. The White House proposal would empower the Health and Human Services Department to review and roll back health insurance premium hikes nationwide—something never contemplated in either the House or the Senate bill. This poses a potential administrative nightmare, and I think the president probably knows that. It's pure grandstanding, something to deal away in order to get a bill. But if insurers don't cut a deal, the rollback plan just might blunder its way into the final bill.

6) Skin in the game. Health insurers and others complain that the health reform bill does little to control doctor and hospital bills, especially in the private sector. That's true. Health insurers also worry that planned cuts in Medicare fees could lead hospitals and doctors to engage in "cost-shifting," i.e., to increase what they charge private insurers to make up for what they're losing to the government. But let's get serious. Whether health reform becomes law or not, Congress will eventually impose some curbs on Medicare spending, because it must. Only under health reform, though, will $411 billion in subsidies to private health insurers give the government, for the first time ever, a meaningful stake in controlling rising private doctor and hospital fees. Health costs rise faster in the private sector than they do in the public sector, because the government wields greater market clout than private insurers do. Between 1970 and 2003, for example, private health insurance spending rose 10.1 percent annually, as compared with 9 percent for Medicare. If you want to slow medical inflation in the private sector, it makes sense to expand the government's investment in private health care.

7) If health reform fails this time, existing problems will worsen and Congress will be back with a less hospitable proposal to health insurers. "As bad as they are," Arnold Relman wrote in the July 2 New York Review of Books, "things will have to get still worse before major reform becomes politically possible." Granted, Relman sees things getting worse even if Congress goes ahead and passes the health reform bill, which Relman doesn't consider "major reform." Granted, too, the trend in recent years has been for the proletariat, whenever it's getting screwed by big business, to demand smaller government. But surely there's some breaking point at which the public will demand much greater intervention in the health economy. I believe we'll reach it whether health reform passes or not. But it seems logical that we'll reach it sooner if health reform doesn't pass. Perhaps such Machiavellian reasoning ought to make a single-payer advocate like me an opponent of the Obama plan, but I just can't oppose legislation that would bring immediate relief to the uninsured and the underinsured. Health insurers have a simpler calculus to make. To put off a real crackdown on for-profit health insurance, sign on the dotted line today.

8) There's a decent chance health reform won't pass even if health insurers support it. Even if the previous seven arguments are wrong, the health reform bill is so tied up in partisan and abortion politics that AHIP could easily endorse it and it still wouldn't pass. Were that to happen, AHIP would at least have bought some good will.

In Washington, you seldom get in trouble for opposing something. Billy Tauzin, president of the Pharmaceutical Manufacturers of America, is leaving his post this summer, and it's rumored the reason is that drug companies thought he got suckered into supporting health reform. (In truth, if anybody got suckered it was the White House, which pledged foolishly to limit PhRMA's losses to $80 billion.) Ignani's continuing intransigence may reflect anxiety that she might suffer a similar fate. But what's best for Ignani's career is not the same as what's in the insurance industry's best financial interest. Were I chairman of WellPoint, I'd pick up the phone and demand that Congress pass Obama's health proposal right now.

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